Saturday, May 21, 2022

Manufacturing sentiment falls sharply as demand growth slows and costs rise

Optimism fell sharply in April, as growth in manufacturing output and new orders slowed and costs and selling prices grew at their fastest paces in over 40 years.

Investment intentions weakened notably, but employment growth improved and is expected to pick up further next quarter.

The survey, based on the responses of 250 manufacturing firms, found:

  • Business optimism fell at the sharpest pace since April 2020 (-34% from -9% in January).
  • Output volumes in the quarter to April grew at a slower pace than in the quarter to March (balance of +19% from +27%), but growth remained above the long-run average (+3%).
  • Total new orders rose at a slower pace in the three months to April compared with January (+22% from +38%). Firms expect growth to slow further over the next three months (+6%).
  • Average costs in the quarter to April grew at the fastest rate since July 1975 (+87% from +74% in January), while domestic prices grew at the fastest pace since October 1979 (+60% from +40% in January).
  • A supplementary question found that the cost of raw materials was the most important factor behind expectations for cost growth in the next three months (80% of respondents said this was extremely important), followed by energy costs (59%), transport costs (41%) and labour costs (38%).
  • Investment intentions for the year ahead weakened across the board in comparison to January; plant & machinery (+9% from +26%), product & process innovation (+1% from +26%), training (-3% from +26%) and buildings (-6% from +2%).

Anna Leach, CBI deputy chief economist, said: “Manufacturing orders and output continue to grow, albeit at slower rates. But the war in Ukraine is exacerbating the Covid-related supply crunch, with cost increases and concerns over the availability of raw materials at their highest since the mid-1970s. It’s little wonder that sentiment has deteriorated sharply over the past three months and manufacturers are now scaling back their investment plans.

“The government must look again at near-term support measures to help firms through this crisis. An immediate priority should be to provide cashflow support for those struggling with wholesale energy costs via the Recovery Loan Scheme, while cutting bills for Energy Intensive Industries can help maintain UK competitiveness.”

Simon Eaves, market unit lead, UK & Ireland at Accenture, said: “The manufacturing sector is showing resilience in output, but the drop in optimism is concerning in the face of challenges including rising costs and the availability of materials. To maintain competitiveness businesses need to make balanced decisions for the near and long term to secure their future.

“In the short term, retaining, motivating and upskilling staff is critical as well as lowering process costs and making the supply chain as efficient as possible. For the longer term, a twin focus on investing in digitalisation and sustainability is crucial to gain success past the current cycle.”

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